Discussion
Statement I: Discounting reduces the weight given to costs far in the future.
Statement II: A sum spent in twenty years has a lower present value than the same sum spent today.
In the light of the above statements, choose the correct answer.
Answer: A
Correct answer: Both Statement I and Statement II are correct
Both statements are correct, and the second is simply the first stated concretely. Discounting converts future sums to present value by dividing by \( (1+r)^n \), so the further away a cost lies the less weight it carries in today's decision.
At 7 per cent, a sum twenty years away is worth about a quarter of its face value. This has a real consequence for life cycle cost analysis: it systematically favours designs with low acquisition cost over those with low operating cost, and the discount rate chosen can decide a trade study on its own.
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